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WHAT IS AN EXIT STRATEGY, ANYWAY?

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It seems odd – you’re just starting your company, and you’re supposed to think about the end of it? While it might feel counterintuitive, it’s important to start with the end in mind. Knowing if you are planning on going public, selling to employees or family members, or being acquired by a bigger company will likely impact your business decisions, even in the infancy of the company.

So what is an “exit strategy” anyway? In its most basic form, an exit strategy contains plans, or goals, for the eventuality of the company and its founders. These plans come in many shapes and sizes, from a complex IPO (initial public offering) to a simple corporate dissolution. Here are some of the most common types of exit we see.

Acquisition

Selling your business to another company is often a very attractive option for entrepreneurs. It is a fairly straightforward process, particularly if your records have been kept complete and accessible as a part of your business strategy. In an acquisition, the buyer is often another company that is looking to expand into new markets and/or products. Ideally, the seller can identify several interested buyers in order to improve the seller’s negotiating position. The buyer may purchase the business with cash, stock or a combination of the two. Often, the management team is kept in place to continue running that branch of the new business, at least for a short term.

Manager/Friendly Buyout

Instead of selling the business to a competitor or similar business, one option is to sell to someone already familiar with the operations, such as an employee, customer, friend or family member. The benefits of this arrangement are that the seller can often continue to be as involved as is mutually agreeable, and the business generally carries on without significant disturbance or deviations. However, sometimes it’s hard to negotiate a fair price when a friend or family member is sitting across the table.

Liquidation/Dissolution

Liquidation is often not the exit strategy businesses plan for, but it can be an attractive option for smaller businesses and lifestyle entrepreneur. Close up shop, sell off the assets, and be done. The proceeds from the assets must go first to the business’s creditors and then divided among the shareholders. The downside to this strategy is that it entirely neglects intangible assets such as client lists, business relationships and company reputation. These can be worth much more than the sellable assets of the company.

IPO (Initial Public Offering)

The most invasive and consuming exit strategy is the IPO. It is imperative that if this is an objective of the company, you prepare from day one, as every corner and crevasse of the business will be scrutinized heavily. While they are seen as “glamorous”, with huge returns to the investors and founders, IPO’s are actually fairly rare. Out of the millions of companies in the US, only about 7,000 of them are public. And for good reason – the process is disruptive, costs millions of dollars and multiple years, and can be risky.

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On October 15, 2014
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